Bankrupt bankruptcy laws

Posted: Mar 15, 2001 12:00 AM
This week the Senate is set to approve sweeping changes in federal bankruptcy law. Personal bankruptcies have climbed 75 percent since 1990. Last year, at the end of the Great Boom, 1.3 million Americans declared bankruptcy, according to The New York Times.

The goal of the reform, say advocates, is to keep affluent people from shucking off legitimate debts, using lenient bankruptcy laws designed to give a fresh start to ordinary Americans who encounter bad times and can't pay their bills. "People with high incomes can run up massive debts, and then use bankruptcy to get out of honoring them," Sen. Orrin Hatch told The New York Times. Credit card companies have lobbied heavily for the change, which makes me suspicious.

On the one hand, it's hard not to agree with Todd J. Zywicki, a bankruptcy specialist at Geroge Mason University Law School, who said, "I can see no good reason why a schoolteacher earning $30,000 a year should have to pay more for a mortgage or more for a new couch because some guy making $100,000 a year finds it inconvenient to pay his debts."

On the other hand, I'm holding in my hand a solicitation for a Visa credit card from a company called Capital One, which came, unsolicited, to my home. I'm sure you get dozens just like this one. It offers a $500 credit limit and a choice of an attractive array of card designs on little stickers, ready to be affixed to the application: dolphins, leopard skin, lightning bolt. Plus a convenient opportunity to charge a subscription to Sports Illustrated, which happens to be my son's favorite magazine.

The offer is in fact addressed to my son, a senior in high school, whose only source of income is me. I don't know about you, but I wouldn't lend $500 bucks to a teen-ager I didn't know and expect to see it again. This is one of dozens of offers my son has received (or more accurately, which I receive and toss in the mail before he opens) since turning 18 last fall. Capital One Visa apparently knows this about my son, because one of the few questions they ask on the application is the name of the school he will be attending next year ("No abbreviations, please").

Meanwhile I regularly receive attractive printed checks from my credit card companies, suggesting I use them to reward myself by going deeper into debt for what can only be called consumer ephemerals. "Cater a party," one company suggested. On the television, ads urge us to borrow money not only to buy a home or a car, but to take a vacation or buy a boat.

Here's the way I see it: Any industry willing to lend money to my son has no business asking Congress to bail it out of the consequences of increasingly irresponsible marketing and loan decisions. I also find it hard to believe that the free market allows credit card companies to bill creditworthy customers for the risks they take in loaning to the bankruptcy-prone, most of whom get charged outrageous interest rates that make this industry a cash cow.

And yet in spite of myself, the new bill looks like a pretty good idea. The new, tougher restrictions are limited to customers who demonstrate enough income to pay off their debts over five years. They will still be allowed access to bankruptcy, but only with some repayment under a court-approved plan. And lower-income debtors will be required to go through a credit-counseling program, which will teach them to resist the unscrupulous efforts by credit card companies urging them to splurge beyond their means.